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Journal of Economic Perspectives: Vol. 4 No. 2 (Spring 1990)

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The Econometrics of Kinked Budget Constraints

Article Citation

Moffitt, Robert. 1990. "The Econometrics of Kinked Budget Constraints." Journal of Economic Perspectives, 4(2): 119-139.

DOI: 10.1257/jep.4.2.119

Abstract

In the last several years, a branch of applied econometrics has developed that is devoted to the development of techniques for the estimation of demand and other functions when the budget constraint is "piecewise-linear,+ or "kinky"—that is, when the constraint consists of a number of segments joined together at kink points. Such constraints most frequently arise from government tax and transfer programs. But kinked constraints sometimes arise in nongovernment contexts, a well-known example being the block pricing schedule commonly set by utilities and volume discounting in general. Kinked budget constraints create two difficulties. First, changes in tax and transfer schedules can have unexpected effects that can be exactly the opposite in sign to those expected from economic theory. Examples of this phenomenon are given below. Second, kinked budget constraints make the estimation of demand functions quite difficult.

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Authors

Moffitt, Robert (Brown U)

JEL Classifications

212: Construction, Analysis, and Use of Econometric Models
022: Microeconomic Theory--Theory of the Household (Consumer Demand
921: Consumer Economics; Levels and Standards of Living--General

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